Source: CBOE Futures Exchange -- The CBOE Volatility Index (VIX) is accelerating in its downtrend. This is likely bullish for stocks and reflective of the strong stock market rally in the S&P 500 Index (SPX) that has taken place so far this year. Not only has the market rallied, it has done so in a very straight-line fashion with small daily ranges.
There have only been four down days in January, and as a result the market is very overbought. The intermediate-term indicators are mostly still positive at this time, although there is one glaring exception -- a new sell signal (just registered today) from the standard equity-only put-call ratio.
Other intermediate-term indicators remain positive, though. For example, $SPX is still clearly in an uptrend. However, if the 1260 level were breached, that would be much more bearish.
An indicator that doesn’t get a lot of attention is how many stocks are above or below their moving averages. In this article, we’re going to take a look at that indicator, using several different moving averages. Clearly, such an indicator is just another way of discerning whether the market is overbought or oversold (or is not). Does this give a better or complementary picture to the indicators that we already use for these purposes, which largely are market breadth and put-call ratios?
The stock market, as measured by the Standard & Poor’s 500 Index (SPX) has been struggling this week. It hasn’t been going down, but it’s been apparent that it was too overbought to go up much, either. Then today, Fed Chairman Bernanke announced the de facto beginning of QE 3, which propelled financial assets of all sorts (except the U.S. dollar) to rally. SPX moved 20 points off its lows; T-Bond futures soared more than two points, Gold rallied $60, and so forth. You get the idea.
Friday was another boring market day, with $SPX in a 6-point range. The reality of the situation seems to have struck $VIX traders, though, as that index lost another 8% on Friday. The downward trend of $VIX is bullish for stocks, but this is beginning to look a big overdone. I would have to say that $VIX at 18 (and $VXO below 17) is certainly in overbought territory.
The stock market continues its slow steady march upward. The $SPX chart is becoming stretched, though, and is somewhat overbought.
The equity-only put-call ratios continue to decline. Thus, they remain on buy signals, but they are not far from reaching the lower regions of their charts, which would make them overbought at least.
Market breadth has been steadily positive, and has reached an overbought state as well -- from which sharp corrections often occur.
The CBOE Futures Exchange (CFE) has launched a new volatility futures contract – this time on the Emerging Markets ETF (EEM). The volatility index (i.e., the EEM VIX) is calculated from EEM options and is listed under the symbol $VXEEM. The futures on that index trade with a base symbol of VXEM. Currently there are March, April and May futures trading. If you’ll recall, after the initial $VIX futures were listed on the CFE, the only other futures to be listed were those on the Gold ETF (GLD).
Each fall we recommend a spread: long Gasoline, short Heating Oil. This fall, the spread had its best year ever. The entry date, Friday November 18th, was perfectly timed, as that was the highest the spread traded (see chart, below). We entered at a price of 53, roughly. From there, the spread plunged (in our favor) until it reached 21 (at $840 per point). We lowered the stop to 28 after that, and were stopped out on January 4th.